A Tale of Two IPOs: Why Facebook Got Disliked and Twitter Got Followed

Columbia Journalism School, Class of 2014

Facebook and Twitter are in the same basic business, and both faced the same kind of scrutiny when they offered shares to the general public (Facebook May, 2012, and Twitter in September, 2013). Yet Facebook’s initial public offering stumbled, as its offering price fell nearly 10 percent by the time the markets closed on opening day, while Twitter soared, rising 73 percent.

It might seem that this simply reflected the behavioral factors that drive stock prices, like exuberance, overconfidence, fear, and the tendency to over-react, but the opening price of an IPO is supposed to reflect a careful valuation on the part of the investment bankers who underwrite it. And it turns out that the stories of these two IPOs do not boil down to over-hype on one hand, and undue pessimism on the other.

What both the underwriters and the initial investors failed to appreciate in Facebook’s case was the remarkable advent, and the rapid rise, of mobile advertising, and its overwhelming importance for social media companies.

Before Facebook went public, Morgan Stanley, the principal investment bank behind the Facebook IPO, found an error in the company’s S-1 prospectus, the document that circulates during the “roadshow” that informs potential investors before a company goes public, and serves as a SEC-certified bill of health.

Facebook had to refile its S-1 because, according to the data that management had released, the trend of increasing mobile daily active users (DAUs) did not correspond to the number of clicks the ads were generating. This finding had significant implications for Facebook’s projections.

According to management notes on the revised S-1: “We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users increasing more rapidly than the increase in the number of ads delivered.” This revision underscored the disconnect between the number of increased users on Facebook’s mobile app and the number of users clicking on ads. Fewer ad clicks translates to less revenue because many advertisers only pay once an ad is clicked on.

In valuing the stock initially, investors evidently thought that mobile usage was only a marginal component of Facebook’s business, and would not affect the IPO valuation. It turned out, however, that the mobile effect was, and is, hugely important to Facebook’s business outlook.

Consider that by last quarter mobile revenue was making up 49% of Facebook’s total revenue, and was the largest single sales stream. By no coincidence, the share price recently has been around $69 – an 80% increase from the opening price on day one.

It seems that Facebook may have met its mobile challenge. Partly, this is because the company redesigned the News Feed with more appealing ads and sponsored content, but another reason is the new partnerships – such as The Facebook Exchange – that the company has entered into with various ad exchanges and networks.

“The future is mobile,” said Mike Rubenstein, the president of AppNexus, the world’s largest independent ad exchange, which supplies ad services on mobile for such companies as NetFlix and eBay. Rubenstein expects his company’s business in mobile to grow this year by thousands of percentage points.

Investors who ordered Twitter stock before the opening bell on Nov. 7, 2013, did not watch their shares plummet as the Facebook hopefuls had. Instead their orders of $26 closed on the first day at $44.90, and at some points soared as high as $50.09, an increase of 93%. Twitter recently has been trading around $55.

Both companies are in the exact same game: ad revenue via social media publishing. It is all about where that revenue can be found. Twitter did not have to cut its revenue for mobile projections, and instead has been building on the ad medium, buying out mobile publisher MoPub just when the company went public.

Twitter in fact sees mobile as the future of advertising. According to a company blog post in September: “The two major trends in the ad world right now are the rapid consumer shift toward mobile usage, and the industry shift to programmatic buying. Twitter sits at the intersection of these, and we think by bringing MoPub’s technology and team to Twitter, we can further drive these trends for the benefit of consumers, advertisers, and agencies.”

Expectations of future earnings are what ultimately drive stock prices, and it seems that the future of mobile advertising is what is driving the stock prices of both Facebook and Twitter. Looking back, it was mobile that accounted for the very different fates of the companies’ IPOs.

This entry was posted on Monday, March 24th, 2014 at 4:19 pm. It is filed under Featured, news & features.
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